What is a Foreign Subsidiary Company?
A foreign subsidiary company is any company where 50% or more of its equity shares are owned by a company incorporated in another foreign nation. In such a case, the said foreign company is called the holding company or the parent company.
For a company to be a foreign subsidiary company in India, it must be incorporated in India. It does not matter which country the parent company is incorporated in.
Compliances are based on many aspects of the company. One must understand what all submissions are supposed to be met according to the type of company incorporated, the industry of operations, annual turnover, and the number of employees. A foreign company is defined under section 2(42) of the Companies Act, 2013; such a company must follow regulations and rules established under multiple legislations and orders such as:
- Companies Act, 2013 – Income Tax Act, 1961
- GST, 2017 – SEBI rules and regulations
- FEMA (Foreign Exchange Management Act), 1999 – RBI compliances etc.
Essential Compliances
The following are the more critical compliances that have to be met by the foreign subsidiary company as per Section 380 and 381 of the Companies Act, 2013:
- Form FC-1 under Section 380: The FC-1 form is essential as the state has to be filed within thirty days of the incorporation of the subsidiary company in India. The paper is not to be submitted alone; it must be accompanied by the required files, certifications etc., from other regulatory bodies in India, such as the RBI.
- Form FC-3 under Section 380: This form needs to be submitted to the respective Registrar of Companies (ROC) depending upon where the company is incorporated in India. The form must contain the details of the areas where the business is going to conduct operations as well as the financial records of the company.
- Form FC-4 under Section 381: This form is concerned with the company's annual returns. It has to be filed within sixty days from the end of the preceding financial year.
- Financial statements: The company has to submit financial comments on its Indian business and operations. This must be submitted within six months of the end of the financial year. They must contain: – Statements on the transfer of funds – Statements of earnings repatriated – Statements on related party transactions such as statements on sales, transfer of property, purchases etc.
- Audit of accounts: All accounts of the foreign subsidiary company must be audited by a Practising Chartered Accountant. These accounts should be properly arranged and made available by the company for the audit.
- Authentication and translation of documents: All the documents submitted by the company to the ROC must be validated by a practising lawyer in India. These documents must also be translated into English before their validation and submission.
Compliances under the Income Tax Act and the GST Act
There are three types of compliances based on the intermittency of these compliances:
Periodic Compliances:
Periodic compliances are compliances that have to be met by the company frequently. Unlike annual compliances, this type of compliance happens in regular intervals multiple times a year. These compliances may need to be met quarterly or on a half-yearly basis.
Annual Compliances:
Annual compliances are compliance that needs to be met once every year. Every year the company has to meet these compliances mandatorily. For example, the company has to do the following every year: – GST filings – TDS filings under the Income Tax Act – Compliances under RBI – Compliances under SEBI's rules and regulations – Annual Financial Statements.
Event-based Compliances:
As mentioned earlier, there are three types of compliances; one of them is event-based. This means that these compliances are only mandatory in a particular event or action.
There are two event-based compliances under the RBI regulations and FEMA guidelines, they are:
- FC-TRS: This concerns the transfer of a foreign subsidiary company's shares between an Indian resident to a non-resident investor or vice-versa. Such a transfer may be done by way of sale or gift. The Foreign Direct Investment policies require that such a transaction be reported within sixty days from the date of the transfer. The obligation of filing this form rests upon the Indian resident or the investee company, as the case may be. This is regardless of whether the Indian resident is the transferer or the transferee.
- FC-GPR: This concerns the remittance received by the shareholders of a foreign subsidiary company. The form specifies the mode of transfer of the remittance by the company to its shareholders.
Importance of Meeting Compliances
A foreign subsidiary company must meet all compliances as there can be severe consequences if they fail to do so. Failure to complete required submissions may result in the company being fined, levying penalties, and criminal charges with imprisonment under relevant provisions of applicable law(s). The following are the penalties that may be imposed against a company for not meeting its compliances: –
Under Section 392 of the Companies Act 2013 (effective from April 1, 2014):
- Notwithstanding anything given under Section 391, if a foreign company is found to have contravened any provisions under Chapter XXII of the Act, the company will be punished by way of a fine that shall be no less than Rs 1. It may extend up to Rs 3 lakh. If the offence continues, a fine of Rs 50,000 will be added for every day the violation continues.
- Every officer of a foreign company in default is punishable by imprisonment for up to 6 months and a fine of a minimum of Rs 25,000, which may extend to up to Rs 5 lakh. A company needs to meet all its compliances to ensure that it can continue with its business operations properly without the authorities' interference.
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